In Comparison to Other Real Estate Investments
One of the best ways to compare real-estate investments is to look at the performance of self-storage and other real-estate investments during the past decade. Recently, Riverbound Storage Management, LLC completed an in-depth study of the performance of multifamily, office, retail and self-storage developments in Texas, Oklahoma, New Mexico, Colorado and Louisiana over the past 10 years. The study focused on the failure rate of those developments that opened between 1980 and 1990 and were operating during the economic recession that began in those states in the mid-1980s.
The results of the study are as follows:
• Multifamily = failure rate of 58 percent
• Office = failure rate of 63 percent
• Retail = failure rate of 53 percent
• Self-storage = failure rate of 8 percent
The number of self-storage properties that ended up for sale in the several real-estate portfolio’s were substantially less than other real-estate properties during the same time period. Of this 8 percent in self-storage failures, a considerable number of businesses were taken back by financial institutions because they were collateral for loans on other real estate.
Why is there a substantial difference in success between self-storage and other real estate? What are the key elements that give self-storage the extra edge for surviving tough economic times? The first thing an investor must
understand is what happens to the end user–residential and commercial customers–during the swings in a market’s economy. During times when a market is experiencing an economic recovery, business begins to thrive, employment opportunities increase and the sales of new and existing single-family homes start to climb. One would expect self-storage properties to do well; most often, they do. An evaluation of typical self-storage property rent rolls during this time would usually show a high percentage of mobile customers–people moving into the market for the first time or customers “buying up” from starter homes.
On the commercial side, increased business activity means an increased volume of self-storage commercial tenants. Conversely, when the economy starts to falter, the same happens to business, employment and real estate in general. However, the reverse effect still causes the same mobility that most often benefits self-storage. People begin moving out of the market or selling their homes and moving into smaller homes or apartments. Commercial businesses downsize or look to self-storage for a more economic means for storing inventories. A staggering economy does have a negative impact on self-storage, but look at how self-storage properties compare to other real estate. During downswings in the economy, multifamily occupancies drop as much as 25 percent, while office and retail occupancies drop as much as 30 percent. Who are the office and retail tenants? Businesses that have either failed, downsized operations and moved to a cheaper property, or completely moved to another market. This is lost income to office and retail properties, and it is not recovered until the market’s economy improves. Self-storage will also have an initial drop in occupancy, which differs from one market to another, but usually averages between 15 percent and 20 percent. However, a typical leverage self-storage property has a break-even occupancy rate between 60 percent and 72 percent. Compare this to leveraged multifamily, office and retail properties with a break-even occupancy rate between 80 percent and 90 percent. Which real-estate investment has more room to absorb market declines?